Friday, 17 August 2018

In today’s guest post,
Jake Richardson discusses the potential future of the British rail network,
both in advance of the changes that Brexit may bring, and also based upon the
historical trends within the industry.

The British railway system has indeed been through
some massive restructuring exercises throughout its history. Post-World War One
and the Victorian era of Britain’s steam railway revolution, all private
companies were rationalised into the ‘Big Four’ predominant companies under The
Railways Act 1921, which included Great Western Railway (GWR), London, Midland
and Scottish Railways (LMS), London and North Eastern Railway (LNER) and Southern
Railway (SR). However, post-World War Two, the railways were once again run
into the ground, meaning post-war nationalisation was inevitable and the
British Railways, latterly known as British Rail, came into action through the
enactment of The Transport Act 1947. For nearly fifty years the nationalised
railway system, which was often associated with inefficiency, industrial strike
activities and poor customer service – as embodied through the infamous British
Railway sandwich - survived the ever-growing case of privatisation under the
Thatcher-led Government during the 1980s. However, privatisation was eventually
achieved during the late 1990s through the enactment of The Railways Act 1993.
The question to be solved here is how should our railways be run? This, as many
would agree, is not as clear cut as one would expect, since many economic,
political, and some legal points need to be discussed. Therefore, this post
will evaluate whether Britain’s railways should return to the era of the 1920s,
if re-nationalisation is the preferred route, considering Labour’s manifesto
under Corbyn supports this model, or whether the current system needs to be
developed further.

Perhaps
a return to the days of the ‘Big Four’ railway companies could be an option
available. However, while John Major believed this to be a valuable option, he
was nevertheless talked out of it because that model was deemed impractical to
recreate; in the sense that each one of the four companies would have to own
the rolling stock and infrastructure. We will use Great Western Railway as an
example of the reasons why such a system could or could not operate. The
profits that Great Western Railway enjoyed were obtained through the creation
of a monopoly on certain routes, particularly the Bristol Mainline section. At
the time, there were no other railway companies that could compete with GWR,
which is still the case today. The only competition GWR faced was that from the
Kennet and Avon canal which, most of the time, had water shortages and the slow
alternative stage-coach services. Profitability was also enjoyed by GWR because
of the lack of health and safety regulation. It was down to GWR to keep their
own staff and infrastructure safe but, of course, profits took precedent back
then and the infrastructure was not up to scratch, as demonstrated by the
bridge collapse over the River Dee in 1847. However, even in the midst of such issues
facing GWR in its early days, it was the only one of the ‘Big Four’ to make a
profit between amalgamation and nationalisation period. Yet, these were the
days when the motor
car and heavy goods vehicle began to take place and offer an alternative means
of transportation of goods and people. Therefore, it is difficult to
determine whether the 1920s railway system would work. Perhaps, with the
increase in passengers and less people commuting to work by car in today’s
society meaning that if there were to be a return to the ‘Big Four’ companies,
then they would be faced with less
competition. Throw in the issue of an ever-growing
population, perhaps a return to just four large companies would mean that the
issue of profitability would be of less concern and investment would be placed
back in the privately owned assets.

Could
a return to a nationalised railway, under the banner of British Rail, work?
When the railway system was first nationalised, it went through a modernisation
plan of around £30 billion in today’s terms. However, this was a missed
opportunity because the investment work only sought to replace what already
existed, instead of looking ahead and future-proofing the system. By the 1950s,
the nationalised system was in decline, partly due to the increase in car usage
and the Beeching cuts of the 1960s, which witnessed the cutting of about a third of the
railway network. Recently, there has been a drive to have the railway
system re-nationalised, with some
viewing the current franchise system as being broken. Upon a closer and
careful inspection of the franchise system you will notice that many of the
train operating companies are foreign state operators, with some including
Ariva, Keolis, Govia, and Go Ahead Group. Almost 90 per cent of the 1.73
billion railway journeys taken in the U.K during 2016-2017 were controlled
and run by foreign-backed rail operators across Europe, with RMT suggesting
that 70% of UK rail operators are now
owned by foreign entities. It seems
ironic then that the British government allows for a state run railway so
long as it is not British. Yet, the result of this causes fragmentation,
with issues over ticketing, coordination, and waste; something which was foretold
in 1993. To add insult to injury, the presence of foreign-backed operators
running the railway system in the U.K means that the British population are the
ones subsidising
the state-run railway systems across the continent. Perhaps Britain’s
departure from the European Union could ignite reform, meaning that the UK
could be released from certain EU rail directives. The bigger question is how
much does the railway system make? According to the Office of Rail and Road,
the total income was £12.4
billion, which included fares and government subsidisation. As one can see,
that is a lot of money. However, closer attention must be given to the
government subsidies. In 2013, the University of Manchester published a report
that found Welsh and Northern railway operators paid out dividends of £176
million between 2007 and 2011, but such profits would not have existed if it
were not for the £2.5
billion in government subsidies. Thus, if the railway system was
nationalised once again, government subsidies would not line the pockets of
private shareholders. Instead, it would be invested into the publicly-owned
railway system to reduce fares and maintain current or future infrastructure
projects. In the midst of all this, there is still support for the current
system to remain and continue. Railway operators like Chiltern or C2C are seen
to have transformed rail services, with Chiltern Railways having invested £130
million of the £320 million cost of the new Oxford to London Marylebone line.
Therefore, perhaps the franchise system can be further developed if rail
operators have an incentive to invest, which can be achieved through longer
periods of franchise agreements so that rail operators have a chance to recover
money from such projects. Developing this line of thought could mean that if
the rail operators oversaw the infrastructure as well as the rolling stock,
with the government creating legislation that operators must abide to, then
rail operators would recognise the need to modernise the infrastructure to
increase train services and profitability.

What
this post has aimed to do is demonstrate the need for the railway system to be
reformed. As to how this should be done is different matter altogether, with
points raised here open to scrutiny whilst others have not been discussed. Indeed, there are major problems with the
current model, as seen with the InterCity East Coast franchise having been
taken into public ownership twice. Through taking back control of the East
Coast mainline, the government is demonstrating that public services must be run
for the people and not for profit; especially since a nationalised East
Coast returned a healthy
£209 million profit to the taxpayer. All too often, the British population
look towards how other states run their rail services. Looking at how our
European neighbours operate their services, one can see that rail travel is
cheaper due to the higher rates of public subsidies which, again, raises the
case for a publicly-owned system. Those in favour of the privatised rail system
often look towards the Japanese model as being the epitome of transport
success, because it is entirely privately controlled. Whereas, the British
model is a collection of temporary
and varying franchises tightly controlled by the government. However,
something which is often overlooked is the current state of the British railway
infrastructure. While attempts have been made to overhaul and modernise the
Victorian model, such as modernisation projects like the Electrification
of the Great Western Mainline, many have been hit with catastrophic delays
to both the punctuality
of train services and the completion of projects. If reform is on the
table, then the Government need to decide how it is going to strike a balance
between the need to continuously modernise the British railway system, whilst providing
a service for its people. So far, this country has been through three models,
each with their own strengths and issues. Times do change and perhaps the old
saying of ‘what goes around comes back around’ may apply here.

Previously in Financial
Regulation Matters we have discussed the issue of whistleblowing, mostly in
relation to the case of Barclay’s CEO Jes Staley (here
and here).
We know that the FCA faced criticism for not suspending Staley in that case, so
today’s news that the regulator are looking into
the conduct of Royal Bank of Canada (RBC) has brought the issue to the
forefront once more. In today’s post we will review this news and look at what
whistleblowing actually means, and its ‘function’ in a much broader sense.

The case with RBC has accelerated after a former trader
recently won his case against the bank for unfair dismissal. The claim,
relating to the trader’s revelations regarding the ‘box-ticking’
culture that was/is prevalent within the firm, concluded with the judge
describing the bank’s conduct as ‘egregious’ and that, ultimately, ‘employers
should take better care of whistleblowers even if they find them somewhat
enervating’. Whilst the FCA has not confirmed the nature of its enquiries with
the firm, it is widely believed that they in relation to claims from
whistleblowers that legal and compliance problems have not
been dealt with adequately for a number of years. For the FCA, it is clear
that the issue of whistleblowing is currently high on its agenda (particularly
after the response to its performance with Staley), as its head – Andrew Bailey
– recently met with the head of Whistleblowers UK to discuss ‘potentially
suspect patters of departures of individuals who have raised compliance issues
at a number of banks’. In Wednesday’s post
we discussed the concept of a regulator’s ‘role’, and presented the concept
that regulators have the role of maintaining the ‘system’, rather than
protecting the public. On that basis we shall not discuss the FCA in too much
detail in this post, but what is of interest is the relationship between the
concept of ‘whistleblowing’ and its importance to the ‘system’.

Within the whistleblowing literature, it is often advanced
that ‘whistleblowing can and should be understood as a “pro-social” process’.
However, there is a competing dynamic at play that revolves around the concept
of ‘loyalty’. Older views on the subject have labelled whistleblowing as being ‘disloyal’
against the firm, although more developed views now consider whistleblowing to
be ‘loyal’ to the firm, particularly if the firm has advanced the notion of
reporting malpractice for the greater good of the company – the concept here is
‘where
an organisation has stated that its staff are expected to report suspected wrongdoing,
the failure to do so may be regarded as disloyal’. That understanding would
suggest that there are positive developments within the field of
whistleblowing, and indeed there are, but the process of whistleblowing is a
multi-faceted process. One of the most important aspects of the process is that
there is adequate protection for one to blow the whistle, and in that regard
there is still plenty of work to be done. It was reported recently that Senior
MPs and campaigners ‘are
demanding the government overhauls laws around whistleblowing, calling the
current legislation “wholly inadequate” and “not fit for purpose”’. These
calls are in relation to the number of individuals who ‘blow the whistle’ but
then lose their jobs, which is a clear inhibitor for whistleblowing. More
worrying still, the article discusses how, perhaps, the greatest impact is
within the NHS where doctors are losing their jobs after highlighting
malpractice. The effect of a reduction in whistleblowing is tremendously
obvious in that particular field, but the reduction of whistleblowing in any
area is a clear social problem.

Unfortunately, there is no easy answer to that question. If
anonymity becomes an absolute in the process, which would protect
whistleblowers, then what would be the impact upon businesses or public bodies?
What if the claim against them is unsubstantiated, or is not a genuine claim?
This is the underlying issue that dominates the concept of whistleblowing and
its development, and it is difficult to foresee a middle ground. In the
excellent International
Handbook on Whistleblowing Research, there are a number of ‘remedies’
discussed, ranging from the criminal law protections that have been developed
in the courts, to those involving the (American) constitutional rights infringements
that punishing dissenting opinions theoretically constitute. However, when
analysing the comparative legal developments, Fasterling finds that there is
plenty of divergence between countries, which perhaps lends itself to ‘social’
foundation of the concept of whistleblowing, which impacts upon how it is
protected, and indeed advanced. Fundamentally, it all may boil down to the
concept of ‘values’, and what a given ‘system’ values.

If a ‘system’ values the development of its business arena,
then how whistleblowing is developed and protected can go one of two ways: it
will either be advanced upon the concept of the whistleblower doing right by
the company and, ultimately, making the organisation a better entity for it, or
it will be repressed upon the basis of protecting the company from a variety of
effects, including external investigations, a loss of reputational capital, or
a number of other things. This discussion directly relates to the discussion on
Wednesday regarding the role of regulators, with the relationship being the
concept of the regulator being an enforcer, but for whom? Again, it is
dependent upon the viewpoint the
regulator takes in relation to its role in the wider arena. Again, we must
look at the evidence rather than the ideology, and on that basis it is
difficult to foresee the process of whistleblowing being afforded more
protection anytime soon. The FCA’s treatment of the Staley case means that, for
them, acknowledging a breaking of the whistleblowing rules is punishment
enough, but the question on the back of that decision is what effect does that
decision have? Does it encourage whistleblowing in the future, when one may
consider that their superiors will circumvent rules to identify them but then
not suffer any serious consequences? Arguably, it does not. Arguably, even
though the Staley case was in relation to a personal connection and then
somebody somewhat outside of the organisation, the sentiment is loud and clear –
the circumvention of whistleblowing rules is allowed, depending upon the
importance of those circumventing the rules. For the FCA, Jes Staley as CEO of
Barclays presents an entirely different proposition than the RBC, and therefore
we may see more punitive action taken in this current case, if the FCA decides
to pursue it. If that is the case, then the sentiment that we can take from
those diverging actions is even more worrying – is it the case that some
people, and organisations (think RBS), are above the law if they are deemed
vital to the national interest? The impending unknown in the UK – Brexit – is defining
the future of the UK, and stories such of those demonstrate that the effects
could be particularly long-term, and particularly damaging.

Wednesday, 15 August 2018

We have reviewed the collapse of BHS here
in Financial Regulation Matters,
whilst we have also reviewed the performance of the Financial Reporting Council
(FRC) here.
We also looked at a number
of investigations that the FRC were undertaking with regards to the audit
sector, with the regulator’s record
fine against PwC for its auditing of BHS being one of the more recent
actions taken. However, what looks like a victory for the regulator, at first
glance, is quickly becoming anything but, and in today’s post we shall look at
the sentiment of the regulators
actions in this case.

One would think that would be the end of this particular
episode, and that we can now focus on the poor job that PwC did when auditing
BHS. The report was released by the FRC on Wednesday, and spans
nearly 40 pages. The report goes into detail regarding the lack of
supervision undertaken by lead partner Steve Denison, the alarmingly short
amount of time that was spent on the audit, and the decisions the board at BHS
were allowed to take and have them signed off by PwC. The report is indeed
highly critical of Denison, PwC, and the board at BHS, but there is one more
twist in the tail. Today in the Financial
Times, it is being reported that ‘the
report released on Wednesday contains differences to the original document that
Sir Philip attempted to block. The FRC declined to comment on what changes were
made’. An example provided of the differences between the two versions
include the previous report stating that the FRC concluded that the management
at BHS had assumptions regarding future losses that ‘were not reasonable’; in
the released report, that sentence was changed to the assumptions regarding
future losses ‘should
have appeared to the respondents to be very optimistic’. This change was
that suggested by counsel for Taveta during the application for an injunction,
and this has lead Field being forthright in his criticism for the concession.
However, does this occurrence tell us something about the reality of the situation between a regulator and the regulated?

It appears that there is a fear that exists within financial
regulators, and if we focus on the dynamics of that particular relationship we
can perhaps see why. The theory behind the relationship is that regulators
operate to protect the public from the iniquities within the marketplace, by
way of either disciplining, or setting standards. Yet, the FRC’s actions, when
combined with the actions taken by the FCA recently with regards
to the releasing of a report into RBS and its GRG unit, suggest that the
actual power dynamic within that regulator-regulated relationship is
tremendously imbalanced. The regulators are, it appears, fearful of going
against what are particularly wealthy and resourceful organisations, with the
legal ramifications for the regulators being much higher if they were to enter
a legal war with the regulated. There is also the issue of the regulators not
wanting to alienate the regulated entities, as it is often prescribed that
working with these entities, rather
than ordering them is the more beneficial route to take. These points are
valid, simply because they make sense. Whilst the regulators represent the
state, they do not have the resources to challenge these massive organisations
legally. Also, it will be easier to work with people and organisations who you
have not alienated. However, if we look at it from the opposing side, there is
an entirely different story.

What justice is there for the 11,000 employees of BHS who
faced losing everything they had saved (and many will not receive what they are
supposed to), or for the many SMEs who were put into a brutal machine within
RBS and HBoS, and in the latter instance are continuing to be consistently
disrespected by Lloyds in their handling of the case? The answer, it appears,
is that the justice they may receive is second to the preservation of order.
That sentence may seem conspiratorial, but it answers the question of why so
few were imprisoned for criminal
conduct in the Financial Crisis, and why so many other scandals are ‘settled’.
But, perhaps this is too idealistic. Perhaps, there needs to be a recalibration
of the role of the regulator. Do they
exist to protect the public, or do they exist to ensure the efficiency of the
marketplace? A definition for the word ‘regulator’ is ‘a person or body that
supervises a particular industry or business activity’, but that does not
describe for what purpose. If we are to ask, then, for what purpose do the
regulators operate, it is arguably important to remove ideology from the
equation (which would be a difficult exercise in the modern era given the prevalence
of ideology over evidence). If we were to remove ideology and replace it with evidence, and historical analysis, then
the answer of for who do regulators operate will become abundantly clear – need
the answer be written here?

Sunday, 12 August 2018

We know here in Financial
Regulation Matters that there were a number of initiatives set up in the
wake of the Financial Crisis, with all of them theoretically designed to guard
against a crisis of similar, or even worse proportions. Some have been somewhat
of a success, and others less so, but recently the Trump administration took
aim at an agency which is purposely designed to guard against another crisis by
providing cutting-edge research to regulators. In this post we will examine the
Office of Financial Research (OFR) and the news that the agency will soon be
experiencing even more job cuts, alongside a further depletion of its
resources. The question will be whether this constitutes just the latest in a
string of events which suggest the onset of ‘regulatory
amnesia’, or the culling of an agency that sounds good in theory, but could
never have been effectual in the real world.

As part of the many reforms brought forward by the Dodd
Franck Act of 2010, the Office of Financial Research was created, and was
designed to support the Financial
Stability Oversight Council (FSOC), which itself sits within the Treasury
Department. The OFR’s official mandate is to look across ‘the financial system to measure
and analyse risks, perform essential research, and collect and standardise
financial data’, and to protect it from a myriad of potential influences,
it was designed so that it would be funded by assessments taken from financial
institutions. The Office also has the power to issue subpoenas to institutions
and people who are not forthcoming with the necessary information required. On
paper this initiative sounds like it is particularly well placed to furnish the
regulatory environment with the up-to-date and critical research it needs to
guard against future crises. However, there is an obvious problem with this
aim. That problem is that by doing so, there is the potential that the Office
will stifle growth in areas which are beneficial to both the financial
marketplace, and also politicians who campaigned on the promise of bringing
about the end of the recession and long-term economic growth. This has been noticed
by commentators, who have suggested that the OFR has been plagued by a
number of issues (some internal, many external), ranging from a lack of
cohesion amongst regulatory agencies, the lack of discipline that the FSOC can
administer, and a reluctance on behalf of the OFR to issue subpoenas.

Here in Financial
Regulation Matters we know full well that there will always be a sharpened
opposition to risk-aversion because, essentially, being risk-averse is not
profitable. It was reported recently that the banking industry is increasing
its lobbying
efforts to repeal certain banking laws in the U.S. that will enable them to
free themselves from certain capital ratio requirements (the so-called G-SIB
Surcharge), and this is not surprising. However, it is relevant to paint a
picture of both the desire to free the industry from crisis-era restraints, and
also the public body support for that to come to reality. Donald Trump vowed to
cut back governmental red-tape throughout his Presidential campaign, and he is
doing just that. Perhaps that is fair – he is doing what he said he would do –
but the reality is that these calls were made under a false pretence. On many occasions
he stated that there was a requirement
to cut the red tape to create jobs in the U.S., and in some cases that may
come to fruition. But an associated reality that he rarely mentioned when
campaigning for office is that this approach disproportionately benefits and
emboldens the rich, with particular reference to the financial powerhouses that
tower over American, and many other societies. We know that after his massive
tax cuts for the rich he proudly declared that he had ‘made his
friends rich’, and developments such as these with respect to the OFR only
further that cause.

Essentially, we are beginning to move through the certain ‘phases’
which can be traced back for a large number of years. The calls by financial
institutions to be freed from restraint, in order to grow and ‘provide jobs’,
is not heeded after a crash. However, those calls never stop, and it is
institutional support from the state that advances the ‘phases’ so that these
calls start developing momentum. Any rational person would surely suggest that,
for what is quite a limited budget anyway, the OFR should be supported further so that, once the
financial institutions begin to make more moves in the marketplace, the
regulators tasked with regulating their activities are provided with as much
information as possible. The logical chain of events is that the financial
institutions are allowed to take more risk but from within the informed and
progressive regulatory arena which monitors and regulates the systemic risk
being taken. Yet, there is a push to do exactly the opposite, with politicians
now queuing up (on the bank of increased lobbying efforts) to severely damage
that regulatory arena. The reason is simple, and it is not related to ‘growth’
or ‘jobs’ – the ‘excess’ that is required to be made to make certain people rich cannot be developed
within that regulatory arena. A solid regulatory arena can allow for the development of ‘growth’ and ‘jobs’, but does so
within a confined, sustainable, and systemically-safe manner; none of those
attributes contribute to the development of excess,
and it is that excess that allows Donald Trump and his ‘friends’ to continue
their dominance. The cuts to the OFR merely represent just one small strand in
what is an ever-unwinding regulatory tapestry. The question then is, and this
is a question we have asked a number of times, is a decade of ‘recovery’ enough
to provide societal stability if another crash takes hold?

Monday, 6 August 2018

House of Fraser, the massive department store that began in
1849, in Glasgow, has been making the business headlines for quite some time.
After the collapse of BHS, House of Fraser stands on the brink of being the
next massive feature of the British High Street to fold. In this post, we will
look at the latest developments as the company battles to stay in existence and
survive the hostile environment facing High Street retailers, whilst we will
also look at the what these developments many mean for the future of British
retailers as we continue to move through the economic cycles.

The answer, arguably, is Amazon. The massive online retailer
is revolutionising the way in which retail companies operate, and is quickly
becoming the focus for targeted
research as we begin to seek to understand its scope, its role, and its
effect. Amazon made the news recently after reporting a profit of $2
billion for the first time in the second quarter, and also for having paid just £4.6 million in tax
within the UK. Predictably, this news has resulted in a number of articles
within the business (and wider) media regarding the system of corporate
taxation, but for us there is another effect which is worth discussing. Earlier
this year a columnist asked ‘is
this the end of the UK’s retail boom?’ after referring to slumps in
spending over usually busy periods (Christmas, and early year periods).
However, perhaps the question should be aimed at the presence of a High Street
at all. The British High Street is fundamentally changing, with bank branch
closures being performed at an accelerated
rate, restaurants struggling
to cope with the economic climate, and now constitutive components of the
traditional High Street model now disappearing. If House of Fraser were to
fall, then the loss of BHS and House of Fraser to the British High Street would
be massively noticeable. The existence of Amazon is providing the retailing
dynamic with a new stimulus, and the sector is being changed irreversibly.
Amazon is forcing society into two particular streams: from a retailer
perspective, it is forcing retailers to compete online, but the dominance of
Amazon in that field is prevalent. From a customer’s perspective, the need to
shop on the High Street is ever-diminishing, with better value and more convenience
to be had via online retailers. This revolution started in 1994 but did not
gather pace until the Financial Crisis took hold, and that is for a good reason
– the economic climate is forcing society into the realm of Amazon, and the
deteriorating High Street is the proof of that. What is means for the future of
the High Street is uncertain, of course, but it is not outside of the realm of
possibility that the concept of a ‘High Street’ will be a thing of the past
very soon. What the High Street of the future will look like is another
question entirely, because the obvious conclusion to make would be that it
would be dominated by discounted stores. But with Poundworld’s demise that may
not be the case, whilst it is also possible that an economic upturn (although
one is surely not forthcoming anytime soon) could reverse these trends
mentioned in this post. Whilst that may apply to consumable items i.e.
restaurants, it is difficult to see a way back from the brink for the large
department stores, which would mark a sea-change for modern living.

Wednesday, 1 August 2018

In Financial
Regulation Matters we have covered the story
of the disgraced GRG unit within RBS from the moment that the scandal was
publicised, and recently that case has taken a particularly disappointing turn.
In other news from the Banking sector, Lloyds have been forced to set aside
even more money to cover PPI claims made against them, bring the prospective to
total to more than £19 billion. In this post, we will assess these stories and
examine what they may mean for the continuing lack of trust that the public
have in the Banking sector.

Starting with RBS, the bank have been in the midst of a
number of legal claims regarding the conduct of its infamous GRG unit, which
was set up to ‘help’ Small and Medium Enterprises (SMEs). Last month the bank
managed to fend off
a claim from a Real Estate group regarding the mis-selling of interest rate
swaps and manipulated interest rate benchmarks, and a couple of days ago managed
to fend
off a claim in the High Court from an SME regarding its treatment via the
GRG unit. Yesterday, however, came the news that many affected SMEs were
dreading, in that the FCA are to take no
disciplinary action against RBS for the conduct of its GRG unit. In
explaining the FCA’s decision, CEO Andrew Bailey stated that the regulator lacks
the powers to take action, although this was followed by the statement that
the lack of action does not condone the actions of the GRG unit. Bailey
suggests this based upon the understanding that whilst the FCA does have the power to punish senior
management within banking institutions, those powers only came into force in
2016 and could therefore not
be used retroactively. This decision falls in line with many other legal
conclusions that suggest that whilst the GRG unit was clearly deficient when it
came to standards, there was little in the way of overtly illegal action. This
is the viewpoint put forward from a number of avenues, despite the damning
report that RBS fought to keep from the public, and revelations that include
leaked memos that declare that GRG were advising its staff that ‘sometimes you
have to let customers hang themselves’ and ‘missed
opportunities will mean missed bonuses’.

The trust that the public have in the banking sector is
incredibly low, and this is because the rate of scandals that are emanating
from the sector is showing no signs of abating. Over at Lloyds Bank, who are having
massive issues with their own version of GRG (albeit via the purchase of
HBoS), it was announced today that the bank have put
aside another £550 million to cover claims for mis-sold PPI. Although the
bank announced this alongside strong financial figures – a pre-tax rise in
profits of 23% to £3.1 billion in six months – the figure of £19.2 billion as a
prospective figure for PPI compensation is difficult to ignore. It is also
worth noting that this figure represents the highest figure for all British
banks and the compensation due to customers who were mis-sold PPI, The bank,
rather predictably, avoided commenting too much on the extra provision, but it
is a damning development for the culture within the bank – although, obviously,
the bank will be quick to write this off as ‘legacy issues’.

In reality, these are not ‘legacy issues’. In fact, they are
representations of a culture that has persevered throughout one of the largest
financial crashes in modern history. Yes the banks are not able to perform in
exactly the same manner, but the sentiment
the banks still display when treating the victims of their transgressive
policies ‘with
contempt’ is truly remarkable. It often goes unsaid that banking does not
have to be like it is, where the actions of the banking companies are almost
adversarial to everybody else but themselves. The trust that the public have in
the sector will have been damaged significantly during the Crisis – this we
know – but the way in which the banks are dealing with the post-Crisis era is
arguably much worse. To transgress is one thing, but to take such an
adversarial approach when it has been proven
that one did wrong is something which can damage the future relationship
between the public and the sector irreversibly. However, there is a
counter-argument to this, and that is that relationship between the banking
sector and the public is absolutely irrelevant. It is perhaps the case that
people would like that relationship to mean something, but from the perspective
of the leading banks there is very little to suggest it is the case. One may
argue that a breakdown in trust on behalf of certain banks, say RBS, would
damage their reputation, but in reality it is riskier to deal with the smaller banks since the Crisis, despite
deposit protection schemes. The Crisis taught us all that the larger the bank,
the safer it is, so why would the banks care about the relationship with the
public? It is worth debating, but it is certainly the case that the ‘regulatory
capital’ argument no longer applies – the banks have been called ‘too-big-to-fail’,
but perhaps it is more the case that they are ‘too-big-to-care’.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.